The Problem With Hillary Clinton Using a Progressive Hero to Attack Bernie Sanders

Gary Gensler’s attacks on Sanders seem hollow given how the Clinton campaign has been largely silent on the issue that defined Gensler's legacy: the regulation of derivatives.

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission (CFTC), right to left, Elisse Walter, chairman of the Securities and Exchange Commission (SEC), Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), Thomas Curry, comptroller of the U.S. currency, Martin Gruenberg, chairman of the Federal Deposit Insurance Corp. (FDIC), Daniel Tarullo, governor of the U.S. Federal Reserve, and Mary Miller, undersecretary for domestic finance at the U.S. Treasury, testify during a Senate Banking Committee hearing in Washington, D.C., U.S., on Thursday, Feb. 14, 2013. U.S. regulators told lawmakers they are making significant progress to prevent a repeat of the 2008 credit crisis, pushing back against complaints of slow progress and efforts to undo parts of the Dodd-Frank Act. Photographer: Andrew Harrer/Bloomberg via Getty Images
Photo: Andrew Harrer/Bloomberg/Getty Images

Hillary Clinton is using a prominent surrogate to attack Bernie Sanders’ emphatic proposals for reforming Wall Street: Gary Gensler, former chair of the Commodity Futures Trading Commission.

Gensler, who is the Clinton campaign’s chief financial officer, has enormous credibility among financial reformers after his aggressive (and lonely) efforts to rein in banks during the early years of the Obama administration.

As a result, the Clinton campaign has tapped him to fend off Sanders and make the difficult case that Clinton is genuinely interested in cleaning up Wall Street.

Gensler, for instance, delivered a pre-buttal before Sanders’ speech on Tuesday, and deemed it insufficient afterward.

But Gensler’s attacks on Sanders come across as hollow given that the Clinton campaign has been largely silent on the issue that defined Gensler’s legacy – the regulation of derivatives – and the undermining of that legacy by the man Obama chose to succeed him.

Much of what Gensler accomplished at CFTC has been washed away by his successor, Timothy Massad. But reversing Massad’s weakening of financial reform is barely a feature of Clinton’s platform.

Gensler came to the Obama administration from Goldman Sachs — in fact, Sanders tried to block him from becoming CFTC chair in 2009 for that reason. Despite his background, however, Gensler used his considerable power to rein in the out-of-control derivatives market. Derivatives are different types of bets placed by investors who don’t own the underlying assets. They helped fuel the 2008 financial crisis by magnifying the amount of money at stake when the housing bubble collapsed.

When he was at the Treasury Department in the Clinton administration, Gensler worked to ban derivatives regulation. But after the crisis, he helped write stronger derivatives language in the Dodd-Frank financial reform bill, ensuring that they would be transparently traded through central clearinghouses — giving everyone a window into their risk and scope.

He took extreme action to preserve those rules, beating back lobbyists and even fellow regulators. Gensler’s former friends on Wall Street felt betrayed; his name became “like a curse word,” according to former SEC Commissioner Daniel Gallagher.

But since his departure in early 2014, most of Gensler’s priorities for a transparent derivatives market with consistent rules of the road have been weakened or obliterated. Massad, a former corporate lawyer, is known for pursuing a “softer tone” with the financial institutions he regulates, as well as handing the industry favors that roll back what Gensler worked so hard to accomplish.

Last month, for instance, the CFTC passed new rules that waive the initial collateral requirement on so-called inter-affiliate trades occurring between subsidiaries of the same corporate parent. Goldman Sachs and Citigroup lobbied heavily for the concession, according to federal disclosures. Not only will this save those banks — two of the largest derivatives traders — billions of dollars, but it creates what Better Markets CEO Dennis Kelleher has called a “ticking time bomb,” with uncollateralized exposures making it more difficult to wind down failing firms. Massad has openly called for leniency on other capital rules that would save banks cash.

A bigger issue has been repeated delays of the so-called cross-border rule, governing whether CFTC can monitor derivatives trades performed overseas by firms with substantial business in the United States. The fifth and most recent delay occurred last August; it’s unclear when, if ever, it will be finalized.

Gensler has said that inadequate cross-border rules would make 70 to 80 percent of derivatives regulations irrelevant, because firms could just site their trades wherever rules are weakest, allowing risk to pool at large traders outside the prying eyes of regulators.

That’s precisely what has occurred. Reuters reported in August that banks have hidden hundreds of billions in swap trades overseas to avoid oversight, taking advantage of a loophole carved out of a footnote. As much as 95 percent of some derivatives markets have disappeared over the past two years. Massad has made virtually no effort to change the rules to bring overseas trades back under CFTC jurisdiction.

These are just some of the many ways Gensler’s accomplishments have been undermined. But Hillary Clinton’s Wall Street reform plan doesn’t dwell on them.

She wants to reinstate the “swaps push-out” rule to force derivatives trading desks to be separately capitalized — something Congress, not Massad, eliminated. And she makes a vague nod toward enhancing “international cooperation” on collateral requirements for derivatives trades. But bringing international collateral rules in line doesn’t really address what Massad did to U.S. rules just last month.

When asked for Gensler’s views on Massad’s tenure and whether a hypothetical Clinton administration would prioritize restoring stronger derivatives rules, the campaign declined to comment.

Gensler’s comments about Sanders repeatedly attacked him for failing to consider the shadow banking system: the collection of financial institutions whose activities sit outside the regulatory perimeter. But after two years of CFTC give-backs, much of the derivatives market sits in the shadows as well. On this point Gensler and Clinton have said little, and the silence speaks volumes.

Top photo: Gary Gensler testifies on Capitol Hill in 2013.

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